Don’t Adopt Your Financial Advisor

Are you paying more to your financial advisor than your children will inherit?

Congratulations, you just adopted your financial advisor.

But how is this possible?

Let me breakdown an example:

Assume you have $3 million dollars when you retire. According to a survey by Kitces.com, the median asset under management percentage fee for $3 million dollars is .85%. That means you are paying $25,500 a year just to the advisor, not including other fund expenses.

When advisors talk in percentages, it seems small like just 1%. When stating the dollar amount, you realize it is probably one of your biggest expenses of the year.

Assume you live 30 years in retirement and that you have preserved your $3 million balance because you live off the growth and income. That means you’ve paid $25,500 a year to your advisor for 30 years totaling $765,000 dollars. If you have more than 3 children, congratulations you just “adopted” your advisor because their lifetime payout is more than what each child inherits.

This isn’t factoring in the opportunity cost of a seemingly small percentage fee compounded over 30 years. Here is another quick example:

Assume you have $100,000 dollars you don’t need for your living expenses and have decided to invest it long-term for your heirs. If invested 30 years ago (10/01/1993 – 09/30/2023) into the S&P 500, your money would have grown to $1.67 million. Now let’s say you’ve been paying a 1% fee each year for the same investment. At the end of 30 years, you have $1.27 million. A one percent fee compounded over 30 years cost you $400,000 or a fourth of your total return.

Maybe your advisor claims to outperform the market net-of-fees. While that is possible, the odds are not in your favor. S&P Global shows over a 15-year period, less than 8% of all large-cap funds outperformed the S&P 500 index. This is why I charge a flat-fee based on complexity and value I can provide.